THE CLASSICAL ECONOMISTS PERCEIVE THE INDUSTRIAL REVOLUTION An Essay Presented by James Bradford De Long to The Committee on Degrees in Social Studies in partial fulfillment of the requirements for the degree with honors of Bachelor of Arts Harvard College March, 1982 CONTENTS I. . INTRODUCTION: POLITICAL ECONOMY AND THE INDUSTRIAL REVOLUTION page 1 II. ., THE CLASSICAL ECONOMISTS page 11 III •. THE TRANSFORMATION OF THE BRITISH ECONOMY page 27 IV. CLASSICAL ECONOMIC THEORY: THE WAGES OF LABOR page 35 V. CLASSICAL ECONOMIC THEORY: THE PROFITS OF STOCK page 54 VI. CLASSICAL ECONOMIC THEORY: THE YIELD OF OF CAPITAL page 71 VII. THE INADEQUACY OF LATE CLASSICAL ECONOMIC THEORY page 85 VIII. THE FORMATION OF THE LATE CLASSICAL ORTHODOXY page 94 NOTES page 106 APPENDIX I page 131 APPENDIX II page 134 BIBLIOGRAPHY page 135 -1- I. INTRODUCTION: POLITICAL ECONOMY AND THE INDUSTRIAL REVOLUTION Consider the classical economists, those British writers from Thomas Malthus and David Ricardo to J.S. Mill and J.E. Cairnes who thought of themselves as colleagues and pupils of Adam Smith.l The classical economists created the science of political economy. They tried to reveal Newtonian-mechanical laws by which the economy in which they were placed, the economy of nineteenthcentury Britain, operated. They traced the ramifications of the organization of production and distribution through the market. They worked out the consequences of the assumption that human beings are self-interested. They took the political, intellectual, moral, institutional, and sociological facets of their society--all the structures that underlay economic life--as given.2 They constructed the theories of economic life that made up classical political eco- 3 nomy. Classical political economy flourished for about three generations. The school took solid form in 1815, when Ricardo, Torrens, Malthus, and West all published pamphlets which analyzed rent from within an unmistakeably classical framework. The school came to an end in the 1880's: Jevons lamented that the "Ricardo-Mill school" had put economics on a mistaken path for half a century, and Henry Sidgwick admitted that "Political Economy had returned to the [confused and unsettled] condition" that it had been in during the first few years of the classical school. This is not to say that the -2- economists of the 1890's rejected classical political economy; Marshall and his peers saw themselves as building on their clas- sical predecessors. But as .aJliving tradition of analysis clas- sical political economy had come to an end by 1885.4 The frame- work for economic analysis set out by Ricardo lasted for roughly seventy years. While Ricardo and his successor classical economists theor- ized, the British economy of the early nineteenth century that was the object of their theorizing vanished. The industrial revolution removed it. Between 1810 and 1860 the economy of Great Britain was transformed from the predominantly agricultural capitalist mar- ket economy that had surrounded Ricardo to the predominantly indus- trial capitalist market economy that surrounded Cairnes. By far the greatest part of the structural changes induced by the indus- trial revolution in the institutional and social bases of the Brit- ish economy took place during those fifty years. And by far the greatest part of the changes in the economy itself that turned it into an example of industrial capitalism came to pass over this . d 5 perlo . These changes in the British economy had reflections: to the extent that there are economic laws--,useful approximations that explain large numbers of economic actions in simple ways--the first half of the nineteenth century saw massive changes in these laws. Since a valid theory of the economy contains these laws that are approximately true of actual economic life, the first half of the nineteenth century also saw massive changes in the "correct" econo- mic theories to be applied to the study of Britain's economy. The -3- economy in which John Stuart Mill lived while he revised his Princi- pies of Political Economy was very different from the economy in which David Ricardo had lived while he revised his Principles; the same theoretical framework could not have been adequate to analyze the economies of both periods. Did the theories of classical political economy change suf- ficiently over the lifespan of the school to adequately handle the transformation the industrial revolution wrought upon the British economy? This question is my subject. My answer is: "Largely, no." There were definite adjustments that. could have been made to the analytical framework of classical political economy in order to take into account the changes in the structure of Britain's economic life that took place from roughly 1810 to roughly 1860. And these adjustments were not made. This essay, then, is a work of intellectual history. It is a case study, a study of the reaction of a particular intellec- tual community of social scientists--the classical economists--to the transformation of the object of their study--the British eCO- nomy. Of course, it suggests wider implications: in a rapidly changing world, many groups of social scientists will find themselves in positions similar to that of the classical economists between 1815 and 1885. But the scope of this essay is necessarily too small to pursue any such implications: this essay speaks directly only to the history of British economic thought from David Ricardo . . 6 to John Ellot Calrnes. -4- The argument is divided into four parts. The first (chapter II) establishes the existence and relevance of the group studied, the scientific intellectual community of the classical economists. The second (chapter III) describes the transformation in the British economy that took place during the age of the classical economists and sets out changes in economic theory that could reasonably have been expected to have been induced by the changes in economic fact. The third part (chapters IV, V, and VI) searches for these changes; chapter IV looks for shifts in the economic category of "wages," and chapters V and VI look for shifts in the categories of "capital" and "profit"; the shifts are not found. The fourth part (chapters VII and VIII) considers the reasons for this divergence of economy and theory. And that which comes before the argument proper (chapter I) gives a brief sketch of the entire essay. There did exist a scientific intellectual community of econo- mists in Britain between 1815 and 1885. In other words, the group labeled "the classical economists" had the following characteristics: First, the classical economists talked to each other--often. They valued each other's opinions of their work; they assailed each other in their writings; they took criticism from other members of the intellectual community seriously and felt obliged to answer it. Second, the classical economists shared a special language of terms and set of categories for analysis; they had common norms of argument and proof; they all participated in the same "discourse."7 Third, they recognized themselves and were recognized as a group apart, as an intellectual set possessing a unique view of the world. -5- They saw themselves as a small group establishing scientific truth in an area long clouded with ignorance; they called themselves the "political economists." Fourth and last, the classical economists all analyzed something called the "economy," a distinct sphere of social life concerned with the production, distribution, and exchange of goods and services. Because the classical economists did form a scientific intellectual community, an .," invisible college, ,,8 they shared a sense of what phenomena to explain, what analytical categories to use, and what rules of procedure to follow. They possessed a common analy- tical framework: for example, all classical economists aggregated individuals into three groups--landlords, laborers, and capitalists--and all were concerned with long-run tendencies, with the "natural" price rather than the deviations of "market" from "na- tural" price. And their mutual recognition of one another as scientists, as intellectual peers, kept this consensus analytical framework from dissolution. Therefore at each moment there was substantial agreement among the classical economists with respect to the substance and method of political economy. Within this framework of concepts and rules of argument, there was also substantial agreement on what current theory was and what the principal empirical results and political implications oE political economy were. At any given instant, there was a methodological, analytical, and empirical orthodoxy. This orthodoxy consisted of two parts. First, there was the overall analytical framework of classical political economy; this could not -6- be radically changed unless the classical school itself dissolved. Second, there were the accepted theories of how the analytical constructs of classical political economy behaved; these could and did change over time while remaining within the classical school. The theories and opinions of individual thinkers were dispersed, in various directions, about this orthodoxy. But since there was substantial agreement on the nature of the orthodoxy itself, it can be taken as "the" doctrine of classical political economy at that time, it can be usefully considered to stand for the thought of the whole group. And it is possible to judge how this orthodoxy shifted over the decades of classica.l political economy, for the classical economists wrote books called Principles of Political 9 Economy: Each Principles was written with the same definite purpose: to teach its readers the foundations, methods, and conclusions of classical political economy. Each Principles text contains a particular economist's view of what the orthodoxy of classical political economy was--or what he thought it ought to have been--at the time of his writing. The shifts in the orthodoxy leave their clear trace in the theories laid out in the various Principles. The transformation of the British 'economy during the nineteenth century induced majo:r cchangesc:in. the' II correct,,:: economic theory elaborated within the classical framework in two areas. First, in 1860 labor was far more nearly a commodity than it had been in 1810. In l8l0, most British workers still worked in employments which had their rewards determined by "customs," by something unlike the equilibrium of a widespread market. In fact, the determination of wages -7- by tradition and status largely insulated workers from competitive pressures. By 1860 this was no longer true. Wages were then determined by a melange of status, competition, and (for the unionized skilled~laborers) collective bargaining. An adequate classical economic theory of 1870 had to treat wages as an economic variable, determined within the system of the economy. An adequate classical economic theory of 1810 could take the level of wages as data, determined by forces outside the bounds of the economy. Second, the first half of the nineteenth century saw a massive shift in the composition of Britain's capital stock. In 1810 the overwhelming fraction of Britain.' s reproducible capital was circulating--consumers' goods in production, in transport, or in inventory. By 1860 the major fraction of capital was in the form of embodied technology, of factories and machines. Production in 1810 had for the most part depended on ancestral technology that required little specialized fixed capital. Production in 1860 depended on modern technology embodied in specialized fixed capital. Since the objects that were called "capital" in 1860 were so different from the objects so called in 1810, the classical economic theories current that described the behavior of the analytical construct of capi tal should have been very different iOn 1860 from what they had been in 1815. To put it another way, the year 1810 saw Britain with an agrarian capitalist market economy_ It had substantial non-agricultural sectors--agriculture accounted for only around forty percent of the national product. But the capitalist agricultural sector was sufficiently large and central to dominate the aggregate workings -8- of the economy. True, the industrial revolution was underway, but the sectors that had yet been affected by it were small, exceptional, and did not need to be considered in a first approximation to the structure of the economy. By 1860 this pattern had decisively shif- . ted. The sterling value of manufacturing production had quadrupled; the value of agricultural production had no~ increased at all. And the manufacturing sector had become industrial. When this industrialization is viewed from the analytical framework of classical political economy, it shows itself as major shifts in the phenomena that fall under the categories of "wages" and of "capital." Were these shifts in the reality behind the analytical constructs reflected in shifts in the behavior of the analytical constructs themselves? Essentially not. Ricardo and his contemporaries built a political economy that helped to illuminate the then pre-industrial, agrarian capitalist British economy. Their successors--Senior, McCulloch, Scrope, Bailey, Lloyd;,Longfield, and others--spent their time modifying Ricardo's theories in various directions. Each be- gan from a Ricardian perspective and worked greater of lesser changes upon it. The generation of political economists that followed Ricardo did not, however, replace his orthodoxy. The spread of individual opinions about the central orthoddxy increased, but there was no general-agreement in the directions in which economic theory should have been shifted. So there was no major shift of the orthodoxy itself. Then J.S. Mill synthesized and restated classical political economy. Since he viewed himself as presenting a well-established body of knowledge, he did not incorporate into his formulation the -9- changes that would have better enabled a classical analytical frame- work to deal with the British economy of the last half of the nine- teenth century. And the others of the late classical economists were comfortable with Mill's formulation, so comfortable that it was never seriously challenged from within classical political eco- nomy. In fact, Mill's formulation was replaced only when the devel- opment of the analytical tools of marginal analysis turned the atten- tion of economists from the issues dealt with by Ricardo and Mill to . 10 a new set 0 questlons. But as long as classical political economy lasted it found itself in a strongly Ricardian mold. Rica,rdo' s successors spent their time correcting and elaborating his theories of wages and capital; they did not forge new theories that then could have been fitted into the',classical framework. And so the orthodoxy of the classical economists did not tranqfor;rn so as to cover the changing economy. Classicalpoli tical economy drifted,' further and further out of phase with the real economy until classical political economy's end. Why did this drift of theory from reality happen? There are five types of explanations for the failure of classical political economy to respond in its theories to the changes wrought by the industrial revolution. All are valid within their spheres. And none of them is complete without all the others. First, John Stuart Mill dominated the later classical econo- mists, and Mill's economic thought had been formed when he was very young. Second, the structural shifts in the British economy were neither complete nor obvious to those alive at the time; thus the degree to which classical political economy "should" have seen the f -10- transformation of the industrial revolution is not clearcut. Third, the formation of the orthodoxy of late classical political economy took place in a time of great prosperity; the supersession of classical political economy took place in a time of great depression; to some degree the development of economic theory is itself a function of other economic variables. Fourth, economics has always been soaked with ideology; therefore to expect economics to behave according to the canons of science is to be inevitably disappointed. Fifth, the structure of the economy changes, yet economics habitually uses methods of procedure copied from the natural sciences; natural ~ciences are inherently conservative, and they do not encourage the replacement of one theory by another; this is fine for an intellectual discipline investigating phenomena of unchanging structure, but the rules of procedure of classical political economy inevitably gave too much weight to anachronistic theory and too little to present empirical reality.